Small business Law Articles

Cooperatives and Small Business

A cooperative entity may be a perfect choice when a small business works with a group or community of individuals. Small businesses in the same industry may find substantial benefit from forming a cooperative association

A cooperative entity may be a perfect choice when a small business works with a group or community of individuals. Small businesses in the same industry may find substantial benefit from forming a cooperative association

Important Tip Cooperatives need to share identity, values and principles to be able to function effectively.

A cooperative or co-op is a business entity formed by a set of individuals who have a common goal or interest. A cooperative is member-owned and democratically controlled, meaning the members have an equal say, and its purpose is to meet the needs of the members. As such, forming a cooperative can be a good choice when a group of people acting together can accomplish a goal that could not be accomplished by individual members acting on their own. When your small business idea concerns a group or community of individuals working together, a cooperative entity should be considered.

Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. The membership of a cooperative believes in the ethical values of honesty, openness, social responsibility and caring for others. Cooperatives worldwide generally operate using the same principles as adopted in 1995 by the International Cooperative Alliance. These principles are part of a cooperative statement of identity, which also includes the definition of a cooperative and a list of cooperative values. This internationally recognized definition of a cooperative is “an autonomous association of persons united voluntarily to meet their common economic, social and/or cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.” The principles of voluntary and open membership, democratic member control, member economic participation, autonomy and independence, education, training and information, cooperation among cooperatives and concern for community are the guidelines cooperatives use to put their values into practice.

The cooperative statement of identity, values and principles set cooperatives apart from other business entities. One major difference is that cooperatives are not investor-oriented. The benefits of a cooperative are not distributed according to the amount of investment or percentage of stock owned. The members of a cooperative provide the financing to support the cooperative’s operations and receive benefits in proportion to their use or patronage of the cooperative. The members’ main obligation is to use the services of the cooperative, and the success of the cooperative is tied to the members’ patronage.

Cooperatives also differ from other business entities in their management. Cooperative members typically have one vote. This one vote per member ensures the principle of democratic control. Control of the cooperative is exercised through adoption of governing documents (i.e. articles of incorporation and bylaws), and election of directors. The directors then set the basic operating policies according to the philosophy of the membership.

Title 7 of the Colorado Revised Statutes, Article 55 “The Colorado Cooperative Act” was enacted in 1996, and it defines the requirements for cooperative business entities in Colorado. It also encourages use of the cooperative model beyond the agricultural arena. The sections of the Act concerning the articles of incorporation and the amendment or restatement of the articles of incorporation provide substantial flexibility and ease in establishing and maintaining a cooperative. The Act also requires certain fundamental matters to be contained in the articles of incorporation and/or the bylaws to ensure the entity has the fundamental characteristics of a cooperative. However, other provisions simply offer guidance, and allow flexibility in areas that can be addressed in the cooperative’s organizing documents.

A Colorado cooperative may be formed for any purpose. One member may facilitate the formation of a cooperative and act as the sole incorporator. But the principle of cooperation requires a group of members for a cooperative to exist. The Act does not specify a minimum number of members, but the use of the plural in many places in the Act indicates the intent that there be multiple members. Therefore, the Act should not be interpreted as permitting a “one member” cooperative.

Cooperatives are often not the best choice for small businesses. The twin goals of profit and return on investment are better served by traditional business entities like limited liability companies, partnerships, sole proprietorships and for-profit corporations. In addition, democratic control can be time consuming and cumbersome for a typical small business. However, small businesses in the same industry may find substantial benefit from forming a cooperative association. Some long-standing U.S. cooperatives are well known. Blue Diamond almonds and Ocean Spray cranberry products are two very successful agricultural and marketing cooperatives. Non-agricultural cooperatives have also been successful particularly in rural electric utilities, telecommunications, housing, banking and even health care. More recently, medical marijuana cooperatives are gaining in popularity in states like Colorado that have legalized medical marijuana.

Additional Information

Important Tip:

Cooperatives need to share identity, values and principles to be able to function effectively.

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Mary Joe has a wealth of diverse business and legal experience, including teaching college business law classes. She is a graduate of Boalt Hall School of Law at the University of California, Berkeley.